Edelweiss Asset Management on Friday announced the second series of the Bharat Bond exchange-traded fund. The asset management company hopes to raise Rs 14,000 crore from the issue, which includes a base issue size of Rs 3,000 crore and an additional greenshoe option of Rs 11,000 crore.
The new fund offer will open on July 14 and close on July 17. Out of the total issue size, 25 per cent will be reserved for retail investors and the remaining 75 per cent for retirement funds, qualified institutional buyers and non-institutional investors.
There will essentially be two fund offerings in the new Bharat Bond ETF series. One fund will mature in April 2025 and the other will mature in April 2031.
What is Bharat Bond ETF?
Bharat Bond ETF is essentially an exchange-traded fund that invests in AAA-rated bonds of public sector enterprises. The first tranche of the Bharat Bond ETF was launched in December 2019. The initial issue size of Rs 7,000 crore was oversubscribed nearly 1.8 times.
The Bharat Bond ETF has a defined maturity date, so at maturity, investors will get back the investment proceeds along with the returns.
The second series of the Bharat Bond ETF will invest in constituents of the Nifty Bharat Bond indices. The Nifty Bharat Bond Index April 2025 includes 12 companies—Power Finance Corp., REC Ltd, Power Grid Corp, National Housing Bank, Indian Oil Corp, National Bank for Agriculture and Rural Development, Hindustan Petroleum, Exim Bank, Indian Railway Finance Corp, NTPC, NHPC, and Nuclear Power Corp of India.
The Nifty Bharat Bond Index April 2031 will have eight constituents – Power Finance Corp, REC, Power Grid, National Highways Authority of India, Nuclear Power Corp, Indian Railway Finance Corp, NHPC and Housing Urban Development Corp.
Tuhin Kanta Pandey, secretary in the Department of Investment and Public Asset Management (DIPAM) hoped that the Bharat bond ETF would help in the development of the bond market.
Moreover, through this ETF, even retail investors will get access to the bond market.
“All of the advantages we could chip into this product, we have. We have looked at liquidity issues; the ease of this, the NAV (net asset value) is published many times during the day, as a passive instrument, we have a very low cost,” pointed Pandey.
Rashesh Shah, chairman of Edelweiss Group, said lack of liquidity in the bond market was an issue even investors were more concerned about, apart from risk.
“Largely, the bond market in India is what we call a buy-and-hold market. You issue a mutual fund or bank buys bonds and holds it till maturity. The secondary market trading on that is not there. Only when an investor knows that even if I own a five-year bond or a ten-year bond if I need the money, I get liquidity,” pointed Shah.
Should you invest in Bharat Bond ETF?
In the current uncertainty driven by the COVID-19 pandemic, investors will be typically looking to park their money in safe assets. In recent years, debt funds have been perceived to be risky, in the wake of the defaults at infra lender IL&FS back in 2018 and the closure of a few debt schemes by the largest fund house earlier this year.
In that respect, the Bharat Bond ETF has low risk, considering that it is only investing in state-owned companies and only those that have the highest credit rating. Furthermore, given that its an ETF, investors can also buy and sell units of the fund on the stock exchanges at any time during its tenure, just like one would buy and sell stocks.
“We have converted the bond market by adding equity market kind of liquidity into this product,” said Shah.
Another advantage of the Bharat Bond ETF is that it is a passive fund, which will carry low expenses compared to actively managed funds. The Bharat Bond ETF has an expense ratio of just 0.0005 per cent. In comparison, actively managed debt funds could have an expense ratio upwards of 0.1 per cent. The lower expense ratio will increase your take-home returns and remember, the expenses keep adding up over time.
In the backdrop of COVID-19 and the huge economic impact, central banks around the world have reduced interest rates. The Reserve Bank of India’s Repo rate is at its lowest at 4 per cent. In such a scenario, where bank interest rates are falling, products like the Bharat Bond ETFs will look attractive for their slightly higher yields. The indices that the new ETFs track have yields to maturity of 5.71 per cent and 6.82 per cent, respectively.
“We believe that as inflation comes under control, as ease of doing business and the supply side constraints come down, on a long-term basis, India should be a low yield environment,” said Shah.
However, what one must remember is that interest rates may not remain at the current low level forever. So, if interest rates start rising, the yields on these ETFs may not look as attractive.
Investments in ETFs also have a tax advantage. Capital gains in ETFs are taxed at 20 per cent with indexation benefits if they are held for over three years. Other instruments like bank deposits are taxed at the investors’ slab rate, which could be as high as 30 per cent.
